Seeking to Build Resilience with Alternatives
Weekly Market Update
Takeaways
Our latest quarterly report reinforces our focus on building resilient portfolios. As traditional diversification becomes less reliable, we believe alternatives, for suitable and qualified investors, have the potential to diversify portfolios through differentiated return drivers and income stability, but outcomes depend on disciplined implementation, thoughtful integration, and careful manager selection.
Global investors continue to assess international participation in the U.S. Treasury market. The foreign ownership share declined from its 2008 peak but has remained roughly unchanged over the past three years. Nonetheless, underlying remain meaningful, and the Middle East conflict could influence country-level shifts demand from certain regions.
Earnings season is underway with early reports and forward indicators pointing to a resilient fundamental backdrop at the onset of the Middle East conflict. We remain focused on fundamentals during this period of uncertainty, and updated corporate guidance will provide a key input for regional and sector performance.
This Week in Charts
Looking Closer
In times of market stress and uncertainty, alternative investment strategies can provide qualified investors differentiated income and return profiles. This uncorrelated exposure with traditional asset classes seeks to enhance portfolio diversification and resilience.
Market and Data Recap
Leveraging alternatives for more resilient portfolios
Markets continue to challenge the traditional 60/40 framework.1 Persistent inflation, shifting central bank expectations, and recent periods of positive stock and bond correlation have reduced the reliability of fixed income as a potential diversifier. In this environment, we look beyond traditional asset classes and refocus around fundamentals, diversification, and resilience. For suitable and qualified investors, alternatives can potentially play a critical role, but we approach them as a complementary asset class within a disciplined asset allocation framework, not as standalone strategies.
We see a case for alternatives in areas that offer low correlation, contractual cash flows, and exposure to durable, secular themes. Private real estate and infrastructure stand out for their ability to generate stable income, link revenues to inflation, and potentially provide long-term capital appreciation. Select hedge fund strategies, particularly those with low beta2 and uncorrelated return profiles (see Figure 1), may help smooth returns and mitigate drawdowns. Together, these exposures seek to improve portfolio efficiency by expanding the opportunity set and introducing differentiated sources of return.
Implementation for suitable clients remains the key determinant of outcomes. Performance dispersion across managers is wide, and access to high-quality managers can materially influence results. We emphasize rigorous due diligence, thoughtful position sizing, and alignment with client objectives, risk tolerance, time horizons, and liquidity needs. Alternatives often require long-term investment commitments and careful integration alongside existing exposures, reinforcing the need for discipline in portfolio construction.
In a forthcoming paper, we will further outline a framework for seeking to incorporate alternatives into qualified portfolios. We will define the primary roles alternatives may play and highlight the importance of minimizing cross-asset correlation to improve resilience during periods of market stress. We will also address key risks, including liquidity, valuation transparency, and manager selection.
Bottom line: For suitable and qualified clients, alternatives may strengthen portfolio resilience as traditional diversification weakens, but outcomes depend on disciplined implementation, manager selection, and clear portfolio roles. We focus on assets and strategies that deliver differentiated return drivers, support income, and inflation resilience, and may help stabilize portfolios through market stress. It is important to note diversification does not guarantee a profit or protect against loss.
The influence of the Middle East conflict on U.S. Treasuries
The monthly Treasury International Capital System (TICS) report for February will be published this week. The report tracks cross-border portfolio flows and positions between U.S. residents and foreign investors and provides updated data on foreign holdings of Treasury securities.
Ahead of this release, TICS data showed foreign holdings of Treasuries at $9.3 trillion in January 2026, near the November 2025 record of $9.4 trillion. Foreign investors held 30.7% of publicly held, marketable Treasuries in January. While this remains below the 56% peak in April 2008, the share has stayed broadly stable in recent years, including 30.6% in 2025, 30.5% in 2024, and 30.1% in both 2022 and 2023.
While the foreign share of Treasury holdings has remained stable since the end of 2022, underlying country-level shifts have been significant. For example, China reduced its Treasury holdings by $173 billion over that period, while Japan increased its holdings by $150 billion.
Holdings by Saudi Arabia, the United Arab Emirates, and Kuwait rose $87 billion between December 2022 and January 2026. Treasury data does not fully capture other Gulf Cooperation Council (GCC) countries3, but a portion of the $322 billion increase in UK holdings since the end of 2022 likely reflects GCC-related flows. Because TICS data relies on U.S.-based custodians, securities held through offshore accounts may not be attributed to actual owners. The Middle East conflict could reduce Treasury demand from some GCC countries, as governments may prioritize domestic spending, including infrastructure repair and supply chain resilience.
Bottom line: The Middle East conflict could affect Treasury demand from certain regions. Because foreign official institutions hold most of their Treasury exposure in bonds rather than bills, reduced demand could place upward pressure on longer-dated yields. At the same time, the Treasury market may not be pricing in sufficient inflation risk: market implied inflation expectations remain modest at 2.4% for 10-year breakevens, compared with a 10-year average Consumer Price Index (CPI) of 3.3%. This combination supports our current underweight duration positioning.
Earnings season will likely depict strong pre-conflict backdrop with outlooks in focus
With first quarter earnings season underway, investors remain focused on whether companies meet rising expectations as estimates move higher despite impact fears around the Middle East conflict. Revision trends remain constructive, particularly in the U.S., where upgrades continue to outpace downgrades and forward earnings expectations have once again pushed above prior targets to 15% year-over-year (y/y) growth.
Outside the U.S., momentum has improved modestly in select regions, particularly those benefiting from the AI capital expenditure (capex) cycle, including Japan, South Korea (where we remain constructive), and Taiwan. Elsewhere, the burden remains on earnings delivery to justify valuations that moved higher late last year, particularly in Europe. Earnings revision momentum remains weaker in Europe (ex-UK), where next-12-month earnings per share (EPS) estimates have declined in recent weeks during the Middle East conflict. As visibility narrows, forward guidance will carry greater weight, and incremental conservatism could drive market reactions.
In the U.S., fundamental underpinnings for forward earnings growth remain intact. Indicators with high correlation to earnings growth, such as South Korean exports, Institute for Supply Management (ISM) Manufacturing and jobless claims are still in supportive territory. Other recent data points such as trailing 28-day change in credit card spending (+4.9% y/y), Redbook same store sales (+7.6% y/y), and TSA traveler throughput point to a resilient U.S. fundamental backdrop during the first month of the Middle East conflict.
On the back of this, each estimate for the remaining quarters of 2026 has moved higher for the S&P 500, despite history suggesting that estimates should fade as the year progresses. Early reporter results point to solid beat rates so far while leadership remains in secular areas around the AI supply chain, with Technology expected to account for more than half of total profit growth. However, broadening growth emerging in areas like Financials (+16% y/y) and Materials (+24% y/y) point to continued strength in more cyclical sectors as well.
From a portfolio perspective, we want to anchor to fundamental strength during periods of uncertainty. As such, we favor maintaining core exposure to consistent, high-quality earnings generators — U.S. equities, large caps, and Technology (semiconductors) where revision momentum and margin strength remain advantages. At the same time, we see value in strategic positioning that can add exposure to thematic areas levered to the AI capex cycle and geopolitical realignment amid energy shocks, including the physical AI supply chain and energy infrastructure and security.
Bottom line: Earnings fundamentals still matter over time as valuations swing with sentiment. While uncertainty around the Middle East conflict persists, the underlying fundamental environment remains supportive for global equities for now. Seeking to capture potential thematic opportunities alongside core secular winners remains attractive as a long-term strategy.
1 A 60/40 portfolio is an investment strategy that allocates 60% to stocks and 40% to bonds, attempting to balance the growth potential of stocks with the stability and income typically associated with bonds.
2 A measure of a stock's or portfolio's sensitivity to overall market movements. A beta of 1 means the asset moves with the market; greater than 1 means it's more volatile than the market; less than 1 means it's less volatile.
3 Regional political and economic union comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
See our weekly CIO Strategy Bulletin for more details